Cryptocurrency holders often want to put their assets into an entity for a host of reasons, such as asset protection, arranging negotiated management rights and exit planning. This post discusses basic federal income tax issues related to holding cryptocurrency inside a partnership (meaning any entity taxed under Subchapter K* of the Internal Revenue Code; the “Code’). Continue Reading Thoughts on Cryptocurrency and Tax Partnerships
Cryptocurrencies might, simplistically, be defined as virtual currencies that use cryptography to secure transactions which are digitally recorded on a widely distributed ledger. The ledger technology uses independent digital systems to timestamp and harmonize transactions. The cryptocurrencies associated with a ledger are often called “coins” or “tokens”.
Cryptocurrency can be acquired in multiple ways. This post covers only common methods, such as purchase, gift, or airdrop following a hard fork. A hard fork occurs when a ledger is subject to modifications that “break” compatibility with an earlier protocol; in other words, each leg of the fork follows different “rules” so the blockchain ledger is split into an original chain and new chain. Hard forks sometimes result in the creation of a new cryptocurrency. An airdrop is a method of distributing cryptocurrency units to the ledger addresses of individual taxpayers. Airdrops sometimes, but not always, follow hard forks. While blockchain technology is interesting, and an elementary understanding of its technological mechanics is useful, it is the tax consequences of the receipt and disposition of cryptocurrency which is the subject of this post. Continue Reading Cryptocurrency: The Basics of Tax Treatment and Recognition
Properly navigating the IRS labyrinth of rules and regulations is difficult and sometimes taxpayers fail to dot every “i” and cross every “t”. The results can sometimes be devastating for both individuals and small businesses. Especially if the IRS chooses to assess penalties for the unknown failures and then pay those penalties from other funds the taxpayer submits through its offset power. The recent case of Special Touch Home Care Services v. United States, provides an example of how this can sometimes occur. Continue Reading Taxpayer’s Informal Claim for Refund of Taxes Paid and Offset by the IRS Denied on a Technicality
Although the government bears the burden of production for penalties, this often involves nothing more than showing that the penalties were properly assessed. Penalty relief is usually only given when the taxpayer can marshal their best facts and make a persuasive argument for leniency. This is because the focus is usually on the actions of the taxpayer in properly reporting amounts on the tax return and not the procedures followed by the IRS. However, recent litigation surrounding Code Sec. 6751 has turned added focus onto the IRS procedures for assessing penalties. This focus has resulted in numerous taxpayers having the opportunity to challenge penalties on technical grounds without delving into the actions of the taxpayer’s tax reporting. In some cases, the IRS has even conceded penalties when faced with their own lack of evidence regarding the proper approval procedures. Continue Reading IRS Fails to Follow its Own Procedures and IRS Counsel Claims Supervisory Approval Still Valid
Dealing with the IRS can be a dangerous labyrinth for the untrained taxpayer or their non-tax advisors. In a recent Federal court case, E. John Rewwer, et al. v. United States, the taxpayers filed the wrong form claiming a refund and both the IRS and the DOJ Tax Division cried foul and tried to dismiss their case. Fortunately, the court found that the taxpayer’s filing met the “informal refund claim” requirements and denied the government’s motion.
The taxpayers received an unfavorable audit determination increasing their tax liabilities for 2007, 2008 and 2009. All amounts were paid and the taxpayers then filed IRS Form 843 (Claim for Refund and Request for Abatement) for all three years. The taxpayer’s attorney, not the taxpayers, signed the requests for refund but didn’t include IRS Form 2848 (Power of Attorney). The IRS allowed the 2008 claim but then denied the 2007 and 2009 claims, so the taxpayers appealed within the IRS. A taxpayer generally has two years from the date of the determination to file a refund suit in federal district court. The taxpayers didn’t hear from IRS Appeals, and the two years was expiring, so they filed their refund suit. Continue Reading Taxpayer Wins Tax Refund Despite IRS Claims That The Taxpayer Used The Wrong Form
Starting any business has risk, and most businesses take time to become profitable. Unfortunately, the IRS sees multiple years of losses from a business as a red-flag that usually results in further scrutiny. That scrutiny can result in disallowance of legitimate business losses and potential penalties for the underreporting. However, with the proper documentation and testimony, legitimate losses over multiple years can be taken and upheld. A recent Tax Court case on a miniature donkey businesses, Huff v. Comm’r, T.C. Memo 2021-140, outlines the factors needed to defend multiple years of losses in a business. Continue Reading Taxpayer’s Testimony on Businesses Losses Defeats IRS Arguments and Penalties
“The investigative work of 2021 has all the makings of a made for TV movie – embezzlement of funds from a nonprofit, a family fraud ring that stole millions in COVID-relief funds and a $1 billion Ponzi scheme used to buy sports teams and luxury vehicles. But this is real life and I’m grateful to our IRS-CI agents for pursuing these leads and ensuring that the perpetrators were prosecuted for their crimes,” said IRS-CI Chief Jim Lee.
The top 10 IRS-CI cases of 2021, as decided by the IRS-CI, include: Continue Reading IRS-Criminal Investigations Counts Down the Top 10 Cases of 2021
All kinds of penalties are being assessed by the Internal Revenue Service (IRS) against taxpayers, and more can be expected in the future. In 1954 there were 13 penalties in the Internal Revenue Code, and now there are more than 150. Taxpayers should not overlook the opportunity to request the IRS to abate penalties. The IRS abates many penalties for reasonable cause. Continue Reading Asking the IRS to Abate Penalties
Once the IRS makes an assessment against a taxpayer, the taxpayer will receive several notices before the IRS takes enforced collection action.
This is the notice that is required before the IRS can levy and seize a taxpayer’s assets.
Some form of response should be sent with respect to these notices. The response, along with a copy of the notice, should be sent by certified mail, return receipt requested, using the envelope provided by the IRS. The purpose in sending a response is so that it will show that the taxpayer is concerned about the taxes and is not ignoring them. Continue Reading Negotiating with the IRS Collection Division
The IRS is vigorously litigating cases involving conservation easements they believe are abusive. One such case was Plateau Holdings, LLC v. Comm’r, T.C. Memo 2020-93 (Plateau I). In that case the Tax Court denied the entire deduction claimed based on a determination that the $25,449,000 value claimed was actually $2,691,200. A 40 percent penalty applied to the overvaluation amount (i.e. $22,757,800). In a subsequent action, Plateau Holdings, LLC v. Comm’r, T.C. Memo 2021-133 (Plateau II), the IRS also sought a 20 percent penalty for negligence on the lower valuation amount denied because the easement deed failed to protect the conservation purpose in perpetuity. However, the taxpayer wasn’t required to pay the 20 percent penalty because the Tax Court concluded they were entitled to a defense against that penalty for acting with reasonable cause and in good faith. Continue Reading Recent Tax Court Case Outlines Factors Taxpayers can use to Avoid Negligence Penalties